Inside Asian Gaming

INSIDE ASIAN GAMING | November 2012 4 Cover Story I t’s been a wild romance between Macau and investors in its casino stocks, a passion borne aloft on 57% gaming revenue growth in 2010, 42% in 2011, an amazing 35% annually on average for the better part of the last decade. Sadly, for those bewitched by the prospects for more of the same, they’re looking at rates of growth forecast in the low double-digits this year and next and many are thinking the music is over. Then there are those who want a love to last and are willing to make a commitment for the sake of steady, sustainable returns. For them the rewards may prove to be even more satisfying. Analysts say Macau is becoming eminently more marriageable in the eyes of this second group, who constitute a different breed in key respects from those who’ve bought the sector for the dizzying top-line growth it’s delivered for much of the post-monopoly era. Notwithstanding a medium term in which revenue growth is likely to be more muted than in the past, it’s Macau’s overarching cash flow story that woos these value investors. They like the earnings colossus the industry has fashioned over the last decade both for its ability to support robust dividend returns while still funding the capital investment that will drive earnings growth and share price appreciation into the future. “Your breadth of investors from around the world is massively changing,” says Sean Monaghan, senior Consumer and Gaming Analyst for HSBC out of Singapore. Here’s why: Since 2009, the industry has displayed not only extraordinary earnings growth—1,148% over the last three years, Cranking Cash Shares of Macau’s casino operators are becoming increasingly attractive for an increasing number of value investors and for a very good reason—they mint money according to research published recently by CLSA Asia-Pacific Markets—but an outsized ability compared with other consumer sectors to turn earnings into cash and dividends. “Still Raining Cash” is the title CLSA assigned to a special report released in September that points this up with some compelling numbers: like of the US$35 billion the industry garnered in revenue last year, $4.2 billion was converted to free cash flow, a ratio of 11.9%; and $3 billion, 8.4%, was paid to shareholders as dividends. The conversion ratio among related consumer sectors—department stores, jewelry, apparel, food and beverage, automobiles and the like? Less than 1% for both. Aaron Fischer, head of Asian Consumer and Gaming Research for CLSA, based in Hong Kong, also notes the high average return on investment for the entire sector in the post-monopoly era: about 40% since 2004, according to his reckoning, with some operators generating more than 100%, Dividends paid by sector per US$100 of consumer spend Source: CLSA Asia-Pacific Markets